On Wall Street, other shoe drops

Commentary: Why deep cutbacks are a bad idea

By

DavidCallaway

SAN FRANCISCO (CBS.MW) -- It started with Internet companies, then spread to broader technology firms and the rest of the manufacturing industry, and after the terrorist attacks last month, to the airlines and leisure businesses.

Now Wall Street, already shaken to the core by the destruction of the Twin Towers and the loss of thousands of lives, is facing the specter of global retrenchment as the economy sinks.

With more than a million people already laid off this year and the nation struggling to cope with grief and panic following the Sept. 11 attacks, investment banks have begun what could be the biggest round of job cuts since the stock market crash of 1987.

Goldman Sachs
GS, -0.87%
which slashed scores of jobs earlier this week in what employees are calling the new "Black Monday," could well exceed the 400 cuts it was reported to be considering if its advisory and underwriting businesses remain weak.

Morgan Stanley
MWD, +0.00%
and Credit Suisse First Boston are slicing another 3,500 jobs between them. And now Merrill Lynch
MER, +0.51%
the largest securities company in the world, is weighing plans to cull its thundering herd by as many as 10,000 after its mauling by the bear market.

At one point last month, in the immediate aftermath of the attacks, someone floated the idea that Wall Street's titans might refrain from large-scale layoffs near-term because of the impact it would have on morale coming so soon after the tragedy.

Not true. If anything, the impact of the attacks on the economy and the financial markets cemented plans in the minds of investment banking executives to cut back now because of the effect the attacks might have on prolonging the economic and market recoveries.

Wall Street is neither compassionate nor hesitant when it comes to cutting jobs to save money. But it is often wrong.

Like the buying and selling in the markets it is built around, the securities industry's employment levels swing like a pendulum between overstaffed and understaffed.

At the moment, with its high-margin businesses like mergers and acquisitions and initial public offerings pretty much at a dead stop, the Street is feeling decidedly overstaffed. But history shows, both in late 1987 and in the cuts of 1994 during the Mexican financial crisis, the industry overdid it and was caught flatfooted when the markets rebounded.

The events of the last six weeks have left everybody depressed and uncertain. Stocks tank with every new anthrax scare, and the flood of earnings reports this month offers little encouragement about the prospects for a recovery before the middle of next year. I think the market will retest last month's lows sometime in the next few weeks.

But just as it looks like it can't get any worse, a curious thing has begun happening. Some of the trading companies are starting to report an increase in activity among long-dormant investors. Big retail brokerages such as Charles Schwab
SC.H, -33.33%
and Datek notched increases in average daily trading, both in September and again in October. See full story.

And when the next decline in stocks comes, it might be deep but it is going to be short-lived. People are simply tired of selling, as you can see from the rush to stocks we've experienced in the last few weeks.

Investment bankers and financial advisers aren't the most popular breed of folk right now. They rank somewhere between journalists and mail carriers in terms of people you want to hear from.

But if the big investment banks get as panicked as many of the companies they advise and start indiscriminately cutting of vast swaths of staffs, they're going to make the nation's economic problems worse, not better.

Now is not the time to panic. Wall Street should know that better than anybody.

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